Market Commentary for the week of June 22, 2009

Next week/next year.
A majority of global markets are witnessing a slowdown in cyclical upside momentum, as this “second-leg” of the intermediate recovery rally starts to lose steam. Although a major new bear phase is unlikely from here, the deceleration of relative strength indices is still problematic, nonetheless. Did you think you could sustain an overbought rally without any capitulation or consequence? (Editors note: If you answered “yes”, then you still haven’t learned anything, have you?)

I believe that longer term risks are abating. Elected officials are getting a grip on economic fundamentals and trying to right the ship. Although most of the damage had been severe, the markets are now more concerned about where we go from here than whom to blame. For this reason, I see the market’s valuation declines as an opportunity, not a liability.

It is interesting to try and identify the sectors of least distress. I am focusing upon demographic and secular opportunity in Energy, Technology, Agriculture (Consumer Non-Cyclicals), Biopharmaceuticals, and Utilities. These sectors are showing strong indication of resilience, recovery and capital gains potential, as well as inventiveness and ingenuity for lesser-known names within those groupings.

Interest rates.
I am concerned, however, about the durability of bond portfolios in a rising interest rate market. So far this year I have pared down our allocation in fixed income by capitalizing upon a price recovery in bonds from last year’s low-water mark, and by locking in any capital gains which I now fear are vulnerable if rates rise in the next 2-3 years. I still remain committed to a “balanced” allocation in our portfolios in order to diversify risk and income potential, but I am mindful, too, that bonds are not immune to price swings which might adversely affect portfolio performance. In fact, given the severity of the equity market’s collapse, I see greater potential for portfolio protection and capital gains within a prudently diversified equity portfolio than through a predominately “risk averse” strategy of owning bonds, exclusively.

I don’t think the selloff, or depreciation potential, in bonds is overdone, or yet finished.

That doesn’t mean that I don’t see value in owning bonds. But any additions I might make at this time would be of relatively short duration. We are in no danger of missing out on the “buy of a lifetime” in bonds. Those opportunities passed us by 5 years ago.

The economy: who’s “right?”
A popular concern is about a protracted stagflation brought upon by ever-increasing deficits and by an ever-diminishing supply of natural resources. These worries run the spectrum from “growth declining” to “major calamity.” Actually, I currently subscribe to neither of those scenarios. While fully aware of an increase in liquidity in the marketplace, I am hopeful, at present, that this liquidity represents the seed money to quell market declines in the future, and to provide investment capital that yields a “return on investment.”

Notably, doomsday concerns are typical from those who believe we have peaked our productivity potential. But these times might be different because the pace of stimulus required to regenerate the global economy will be quickened by an innate demand for solutions to our systemic problems. Any worries about an escalation in negative effects are premature, in my opinion. We are already in a financial mess. The immediate months ahead require remediation, not fear.

Overall, concerns about economic stagnation should be discounted by the depths from which the crisis placed us. It is unlikely for prices, productivity, valuations or ethics to sink much lower than they already have.

I remain positive about the secular potential in global equity markets. While the near-term might be punctuated by a necessary capitulation, (June-November, perhaps), I am a net-buyer of shares that most typify my cycle phase methodology, and which are at sufficient inflection points to merit a long-term commitment.